All Out

Last Tuesday I bought (CYD) on a nice breakout that staged an ugly reversal and led to about the fastest 7% I've ever lost.

Not long after I stopped out on (GFA). That one just never acted right.

This took me back to even since August. Not what I was looking for - I didn't lose money but I didn't make any either.

I've gone ahead and put myself in the penalty box for three weeks. It's the holidays, the market has been tough, and it's an ideal time for me to back off and enjoy the time with my family. I have a strong watchlist of some great stocks setting up nice patterns, so I'll be ready to take another look next year.

Without question this has been my worst year trading - but I also think it's been my most educational. We shall see.

If anyone out there reads this, I wish you and yours a Happy New Year!

New Buy:(GFA), Sell Stop:(RINO)

The current market continues to be very difficult to navigate, for me at least. There are opportunities, but a trader has to be quick, decisive, and CORRECT to profit. More experience would certainly pay off here.

Thursday my buy stop order for (GFA) triggered at $35.28. It's possible I interpreted this chart wrong and got in early, IBD had an article on the stock and called it a cup shaped base with a $37.72 buy point (if the stock does not form a handle). If (GFA) clears that point in high volume I'll add to my position.

Then there's (RINO). This stock had qualified as an eight week hold based on it's tremendous performance, then last week the company announced a secondary offering. Friday morning I stopped out at breakeven - had been up as much as 25% in this position.

I believe this was the third or fourth time I've had a high performing stock announce a secondary offering and fall apart. I've never had one succeed after announcing they would issue shares. Based on this I believe I will add this event to my sell rules - but I'll wait a couple of weeks first to make sure it's not a knee-jerk reaction.

My record is now:

1 - 2 - 6

Profitable since August.

Took Profits on (MELI)

I'm very pleased to report that I booked a 17% profit on (MELI) today after selling it for $51.76. This stock took just over three weeks to meet the 20% profit threshold, so rather than hold it for eight weeks the correct move was to take profits.

This has my current win/loss/push record since my 'August reset' at:

1 - 2 - 5

More importantly, I'm profitable since that time. Not only am I up on closed positions, but I still own (RINO) with a 20% profit and that stock has qualified as a potential big winner, so I will attempt to hold it into January.

I missed (CAAS) yesterday as technical issues delayed me logging into my trading platform and it moved very quickly, but the good news is I'm still picking stocks successfully. This means if I stick to my rules, which have been working well for the past few months, I should continue to profit.

Next stock on my radar is (GFA). The future growth of this stock is huge. I'm eyeing an aggressive buy point of $35.28 reading the chart as a short, ugly cup with handle.

The market continues to see it's skeptics which is fine with me. For now the trend is up and I'll follow it.

Sell Stop:(HMIN), New Buy:(RINO)

Last Thursday I stopped out of (HMIN) by just 3 cents for a 5% loss. The stock has since recovered nicely but that's all part of the deal. In fact, I'd rather see a stock move back up after I stop out because that's a sign of overall market health. The main thing that I still need to evaluate is my stop loss choices, I just don't have much tolerance for taking an 8% loss but I need to make sure this isn't costing me more in the long run.

Today I bought (RINO), a stock which I've watch make a monster run for the past few months. The company's latest earnings qualified it for my basic fundamental criteria and the technicals still look great so I went ahead and bought it at $27.40. This buy point is 10 cents above the previous high off a pullback to the 10 wk moving average. In this very brief correction we've just had, most of the buy points I've seen are leading stocks that pulled back to the 10 week line over a span of three to five weeks. Not an ideal setup but I'll try to take what the market gives me.

This rally has been a bit sketchy but today it finally saw a nice up day on higher volume than the day before. Having said that, volume was still well below average so a cautious approach continues to make sense. In fact, that's why I waited a couple of days before making another buy once I stopped out of (HMIN) - it's worth letting a couple winners go by to make sure I'm not over trading like I used to.

Some Catching up to do...

Once again I've fallen behind here. Time is short these days so I'll keep it brief.

Towards the end of October when I saw the market heading to a correction I moved up my stops to protect my gains (small though they were). I knew there was an issue with my timing and that by the time I'd gotten my system on track the best days of the rally were over. Therefore I was happy to exit that foray into the market even, and that's exactly what I did. Not bad really for a tough whipsawing market.

Then late last week the market looked as though it may have a follow through day on Thursday, so I took a position in (MED) which I've been looking to get into for a couple of months. The stock did well but the market did not follow through, so I closed the position with a 1.5% gain at the end of the day. Hard to sell a good stock I've wanted to own, but I will not initiate new longs in a correction.

I was out of town for a long weekend and the market did stage a follow through day yesterday which has us once again in a rally. I took a look at my watchlist last night to prepare and found that (HMIN) had released earnings and was up considerably after hours.

I bought (HMIN) on the gap up to a new high at open - this is one of the setups I look for. Additionally, I bought (MELI) as it pulled back within a couple percent of the $42.55 buy point it took out last week. I'm not totally comfortable going in this fast to a new rally, so I kept my stop loss orders tight at 4% to reduce my capital exposure until I see how things shape up.

Sell Stop (HMIN), New Buy (PWRD)

Volatility remains high and this rally hasn't gotten any easier. Trading is very tough. My recent 'success,' if I can call it that, is a result of a commitment to my rules - they are what's kept me in the game. What's encouraging is that the rules appear to work even in very challenging circumstances. There are numerous times over the past couple of months that I would've been shaken out of a position if I was actively managing my holdings - instead I've held on, and time will tell if I profit from this.

Friday the market opened hard and (HMIN) took out my break even stop loss order. This position was opened from a conventional canslim buy point well above the moving averages, and those have had trouble in this rally. Since I'd been up 10% the stop loss was at break even so that's fine with me.

My record since my 'reset' is now 0 - 1 - 2.

(EJ) has been really tough to watch. It's been up as much as 25% and come all the way back to within a few percent of my stop loss order. Turns out the company spun off a unit into an IPO of (CRIC) on Friday. That may have marked a bottom for EJ and it came off the 50 dma Friday morning and is up over 10% now from that point.

Friday I took the capital from the sale of (HMIN) and put it into (PWRD) which I've been looking to get into. It's been trading around the 50 dma for about a week. It remains to be seen if the stock is consolidating or if it will bounce off this area. I purchased close enough to the 50 dma that I was able to put my stop loss at 2% so I have very little capital at risk in this position. So far this morning it's up nicely on solid volume.

Backtesting the New Idea

Here's my very quick study of the top stocks on my watchlist, trying to apply a simple and mostly mechanical purchasing method using the 10 wk ma. I attempted to be very conservative and didn't really throw too much logic in - for the most part I just looked at the charts and bought within 3% of the 10 wk - there are however some noted exceptions that I found to be no-brainers (like STEC on crash day, obviously would not have purchased that one).

Leaders from around 8/21
Rules - Buy limit 3% above 10 wk ma
Sell Stop 5%, breakeven after 10% advance
1 week hiatus after stock stops out
EJ - could've been purchased around $18.60 on 8/25 and survived 5% stop loss (now breakeven) - current price $23.58
HMIN - could've been purchased around $28.75 on 10/2 and survived 5% stop loss (now breakeven) - current price $33.30
PWRD - could've been purchased around $36.69 on 9/2 and survived 5% stop loss (now breakeven), high of $50.49, current price $43.82
FUQI - could've been purchased around $24.35 on 9/2 and would've stopped out same day for 5% loss
FUQI - could've been purchased around $27.44 on 9/18 and would've stopped out for breakeven on 10/1
FUQI - could've been purchased around $28.20 on 10/8 and still holding with 5% stop loss - current price $28.00
STEC - did not come near the 10 week until it gapped down and crashed through - easily avoided
GMCR - was below 50 dma and to be avoided at this time, basing
BIDU - could've been purchased around $337.21 on 8/27 and stopped out on 9/1 for 5% loss
ARST - broke the 50 dma several times and therefore would be avoided
MED - could've been purchased around $18.27 on 10/2 and survived 5% stop loss (now breakeven) - current price $22.38
VIT - 5% loss, then avoided (too wide and loose)

Scorecard:
4 - 3 - 1

4 winners up 26%, 15%, 19%, and 22% - each stock has been up at least 20% at their high since purchase
1 stock still held down less than a percent
3 stocks stopped out for 5% loss
1 stock sold for breakeven

Adaptation

We've been having some interesting discussions on the Trade to Retire forums and I wrote a post there that I'd like to put here on my blog as well as it highlights my thoughts and approach to this currently rally.

Here's how I handle market analysis - it's one thing to have an opinion about the market (it's gone too far too fast, etc.) but it's another to act (trade or not trade) on that opinion. I try to separate the two. If the market is in an uptrend and I see a stock I like in a position I like then I will buy it - whether or not I think a rally is extended. This probably adds to my risk, but I'm just not good at picking market tops, so it's best for me to let the market posture and/or my three strikes rule handle that for me.

Now on the other hand, I do think it's important to adapt to the current environment. Standard CAN SLIM buy points have not worked for weeks. They just haven't. The stocks have closed below the buy point, shaken out holders, then turned and advanced. They advance 10 or 15% from traditional buy points and pull back to a moving average instead of the 20% one could historically count on. I saw this through the middle of the year (it was a very expensive lesson) and since I've adjusted my buying strategy I've managed to survive for a few weeks. I would NOT attempt any buys on breakouts/new highs at this time UNLESS the 50 dma/10 wk line were within about 8% of the buy point - that would allow me my standard stop order while giving me the cushion for the stock to pull back to support ((HMIN) did this).

Better yet, I'm looking to buy around the 10 wk line if I like a stock. I think (PWRD) is setting up perfectly for this, and I will look to purchase this if it dips under $42 (assuming nothing else changes). This position would allow for a tighter stop around 4 or 5% and let the stock work up the moving average or just stop out if it can't hold that area. This is how I bought (EJ) and it allowed me to ride out a lot of volatility.

I've decided to conduct the following exercise. I will go back to August 21st on my watchlist and pick my favorite five stocks, then look at the charts from that day and see what would've happened if I'd picked them up around the 10 wk line (within a percent or two - I bet most or all of them touched off this line since August 21st) with about a 5% stop loss order. I'll bet about 75% of these trades would've yielded a 20% gain, possibly before the stock even made a new high. Furthermore, I'll be I could still own the stock today and be in good shape - in fact I do still own (EJ) from that type of purchase around that time.

Short version is this - I think in the current market, traditional CAN SLIM thinking has had me buying when I should be selling (around the new highs) and selling when I should be buying (stopping out around the moving averages). I don't think it's ALWAYS going to be like this and I firmly believe in CAN SLIM, but I also believe in reviewing past trades and adapting as necessary.

Stay the Course

I'm not posting to this blog much these days, and that's a pretty good thing.

In late August I drew a line in the sand and started over sticking to my rules. Since then I've gone 0-1-1, and I currently hold two positions. That's not tremendous results on the surface, but looking at it relatively shows some improvement.

Simply comparing my results over the last two months to the rest of the year shows progress. I've held one stock, (EJ) since 8/24, which embarrassingly is probably some kind of a record for me - my positions usually don't last that long! The stock is up close to 20% for me at this time, and is breaking out of a second stage cup with handle pattern today which allows me the opportunity to hold it for 20% more gain.

My other stock, (HMIN), is also beginning to work a bit.

What's really encouraging is that I've held these stocks through an extremely turbulent market. I've done so not through some great insight or market wisdom, but just from following my own rules. So far, these have worked. Buying close to the right time and giving these stocks the full 8% stop loss has kept me in the market through some violent shakeouts. Now, of course this could all turn tomorrow but for now it appears to be working.

Most importantly, I've had next to no stress about the market. I enjoying talking about it on the forums associated with this blog, but I don't have any emotional baggage directing my actions with regard to my positions. I buy them and I leave them alone. Sure, I have some fear that I'll fail again - but not nearly like I have in the past, and I'm quite certain I don't act on this feeling.

So I guess all this can be summed up as 'no news is good news.'

Sell Stop:(FUQI), New Buy:(HMIN)

I never got much more than 5% in my position in (FUQI), and on 9/18 I stopped out for an 8% loss - the first since my 'new beginning' this year. I'm now 0-1-1.

I took that money and invested it in (HMIN), another small Chinese stock I've been watching that had actually broken out a few days earlier. It was back within a percent of the buy point so I picked it up there.

Having said that, I will hold (EJ), which now has the stop at breakeven, and (HMIN) until they profit or stop out, but after that I will not reload until I see the market acting differently. Right now I just don't see leading stocks leading, breakouts are having trouble, and it's just very, very hard to make a profit. That's not the time to have money in the market.

I don't want to get in the business of predictions, but I think it's reasonable that the market needs to correct before we'll have another nice opportunity. Until then I'll keep watching and do my best to be ready the next time there is a chance to profit.

What I'm Working On

In addition to my daily homework on the market and my positions and watchlist I try to make some time to continue reading books that may help me improved. I've been a bit 'stuck' on Trade Your Way to Financial Freedom for some time. It's academic and a bit dry - though I think it's a worthwhile read.

To greatly oversimplify the content, the book is aimed at helping investors develop as mechanical a system for trading as possible. In fact, many of the topics are directed at program trading (automatic computer trading), though the principles of disciplined trading apply just the same to an individual trading manually.

While I do not necessarily intend to program trade, I would like to take what I can from this book and apply it to my trading with the goal of becoming more disciplined. Additionally, I may have found a nice convergence between a skill I need to develop for my career (I'm a developer for an Identity Management application) and my trading career. I need to learn a software language to further my career. I'm going to be learning JAVA as this is the language most commonly used in my area.

I can put this to use as well in my trading, as I recently had an idea spring out of a frustration I have with IBD's Custom Screen Wizard. What is lacking from this application is any method to gather or store (in a time efficient manner) the information from the screens. As important to me as the current data is, I find historical data equally important. I would like to graph and trend the information on stocks like the price when the enter my screen, how long they stay on it, and the price when they drop off of it. I could do this by exporting the data into spreadsheets every day, but that would take too much time.

What I plan to do is write an application that will automatically execute my screens each weeknight and load the data into a database. I'll then come up with ways to manage and display this data so that over time I should be able to draw some mathematical conclusions about the potential for a stock when it makes one of my screens. Eventually I would hope that I can translate this into a mechanical trading system. For now though I've got a lot of work to do learning a new programming language.

I also ordered another book I want to read - Jack Schwager's Market Wizards. I need some inspiration. I think I'm doing well now but I want to read about some people who've made it - sometimes it's hard not to get discouraged after a string of failures, and I find these stories help get my positive outlook back.

New Buy:(FUQI)

Early this week I took a long look at (FUQI). I reflected on some of the lessons I've learned over the past two years: I tend to overtrade, I often look for the next big winner when I already have a proven winner right in front of me, I lack patience, I lack discipline.



With this in mind I decided to chart my watchlist of leading stocks in a comparison mode (my dailygraphsonline.com subscription has this feature), using a couple of different date ranges. First I compared the stocks (I have about eight on my watchlist) from the start of this rally in early March. I found that (FUQI) and (STEC) had outperformed the rest of the stocks by a significant margin. Then I ran the comparison from a starting date of August 21st, which is the first time IBD changed the outlook to 'Uptrend Resumes' after the rally had hit a rough patch.

The picture is slightly cloudier there - (ARST) has been the top performer since that time, mostly because of a nice breakout last week. (ARST) has had a habit of failed breakouts, but so far this one has held it's gains. After that (FUQI) and (STEC) were close second and third, and then came the rest of the pack.

The reason I ran both date ranges is that I wanted to see which stocks have been the best of the entire rally, and which are showing recent strength. The answer is that (FUQI) and (STEC) fall into both categories, so this is clearly where I should focus my attention. The stocks that have led will most likely (but not always) continue to lead absent some material change.

I already own (EJ) and it's acting well, but I had enough capital for a second stock so instead of watching (HMIN) - which I do think will do well - I decided to put that money to work in (FUQI) if it broke to a new high. It's rebounding from a trip to the 50 dma so this is a valid purchase, though I now try to buy rebounds close to the moving average, not at a new high. In a stock that has done as well as (FUQI), I'm willing to risk buying after it's already made some progress.

The breakout on Wednesday was actually a failure. The stock reversed and closed lower on above average volume. I had a number of thoughts about what to do during the day on Wednesday as the stock price dropped lower and lower. I thought about putting my stop loss below some key levels and cutting losses short. Then I recalled that all the meddling I've done with my stop losses this year has cost me a fair some of money. I followed my rules, left the stop loss order at 8% and just let it go.

Thursday (FUQI) close up a percent, and Friday up 4% after being up as much as 8% intraday. It's certainly not acting great, but I'm green on the position and that beats being red. This stock has outperformed every other stock I've seen in this rally, and I'm simply betting that it will continue to do so, and that if I'm patient with it I'll profit.

(EJ) has woken up a bit, and early morning Friday my position was up 10% so I've moved my stop loss to break-even according to my rules. That leaves only the 8% on (FUQI) currently at risk.

The market itself continues to act very strangely. It was up on good volume this week, but I didn't see leading stocks acting the same way as the indexes - the leaders tended to trade on average to below average volume. This is certainly something to watch, but the system should take care of me and get me out if the market begins to falter.

Sell Stop:(STEC)

Monday (STEC) advanced to $41.74 intraday, meeting the 10% threshold from my purchase price. Therefore I moved my stop loss up to breakeven. Before the day was over I had stopped out as the stock staged a huge volume reversal from a new high to close down around 8% (if I remember correctly).

I don't know what the stock will do from here, but I'm very happy with this new rule. If a stock returns to a proper buy point after being up as much as 10%, I'm just not willing to let that trade turn into a loss. Sure, I'll miss some winners this way - but if I've learned anything this past year it's more important to focus on not losing than it is to focus on winning - this is contrary to almost everything else I've learned in life.

My other position, (EJ) came within 3 cents of my stop loss order, found support around the 50 dma twice this weekend, and is now knocking on the door around $20. Chart looks good to me, fundamentals look good to me, we'll see what happens.

As for the overall market, once again we're in a strange position. Distribution days have built up to the danger zone, leaders have seen some pressure, but the market has not given up and succumbed to a correction, yet.

It's a time for caution, not a time to be aggressive.

Back in the Saddle

Yesterday I purchased two stocks - (EJ) and (STEC).

(EJ) made my High RS/EPS screen a couple of weeks ago so I've had my eye on it. I interpret the chart as a short, ugly cup that formed beginning the week of 6/12 and broke out on just average volume the week of 7/17. The stock advanced 40% and then corrected sharply last week with Monday's sell off, bringing it all the way back to the 50 dma.

What got my attention was the stock's action the rest of last week. While other leaders recovered in mostly below average volume, (EJ) was up on 150% average volume Tuesday and Wednesday and above average Thursday and Friday.

Based on this relative strength I purchased (EJ) about 15 minutes after the open yesterday at $19.30. Since then it has pulled back in average volume yesterday and above average volume today, so I'm in danger of stopping out. Per my rules I have the stop order at 8% below my purchase price and will target a 20% gain on this position.

(STEC) caught my attention with a massive volume move to the upside straight from the open. I missed the move and played it cautiously, holding off on any purchase throughout the day to see if the gains held. They did, and I purchased at $37.61, about 2.5% above the $36.69 pivot. So far the stock is following through to the upside again today. (STEC) is the clear leader of this rally, and should be bought at any reasonable opportunity. I intend to look for a 20% gain on this purchase but will evaluate the chart pattern further to see if this was a 10 wk pullback buy or a second high tight flag pattern. The concern still remains that (STEC) is trading at double it's 200 dma and should be due for a pause or a pullback.

Uptrend Resumes - What does that mean?

IBD has changed the Market Outlook to Uptrend Resumes based on Friday's follow-through action.

It's important to take a moment and evaluate the past couple of weeks and the current market health.

The leading stocks that I follow are, for the most part, extremely extended. Many have more than doubled since their initial breakout, and are even further past their 200 day moving average. Most are trading at prices four times or greater their 52 week lows. The market could use a break to consolidate these gains.

However, I won't carry over this opinion to some speculation about the future action of the market. The current situation is factual - the market still has five distribution days but after last Monday's selloff the indices responded in nothing but strength.

Still, the quick turnaround has not presented many quality buying opportunities. On the contrary I'm left to consider some leaders that have found support at the 50dma - not the ideal setup but one can have some profitable trades here.

I'm going to do something I haven't done before and post here a quick evaluation of my watchlist:

• (STEC) - This stock has found support near the 10wk moving average and could be on the way to forming a three weeks tight pattern. It's hard for me to ignore the selloff a couple weeks ago on the highest weekly volume ever, but equally hard to ignore the way this stock has led the market. Will continue watching.
• (EJ) - In a position to purchase off the 50 dma - could be bought immediately as it's already had two high volume up days off this line. Lot's of overhead but the RS line looks great.
• (FUQI) - Held the $22 buy point in Monday's big selloff and closed in the upper portion of the day's range. Since then volume has been quiet on up days. This stock looks like it has work to do yet, and could probably use a trip to the 50dma.
• (PWRD) - Monday's selloff took it to the 10wma and since then the price has rebounded well, but no volume to confirm the move.
• (BIDU) - Coming straight off the 50dma, but volume is absent.
• (ARST) - Has formed a four weeks tight as volume dries up. This heartbreaker continues to tempt me. Earnings are 9/3 so I will watch but not buy.
• (VIT) - Living on the 50day line - maybe lacking institutional sponsorship?
• (UTA) - See (VIT)...
• (GMCR) - Removed from the watchlist for now.

So that's it. I'll see how the market opens tomorrow and may take a position in EJ while keeping an eye on the rest.

Back to Cash

A bit of a delayed post here. Monday's market wipeout took out all of my stops and put me 100% cash. After the day's action IBD called the Market in Correction.

I'm not going to do anymore 'self-flagellation' as my friend puts it. I've made every mistake you can make investing. I've analyzed it and talked about it here.

Actions speak louder than words and that's why I'm not posting any big promises here anymore. I've refined and documented my rules and they are sound. All that's left is to watch the market and follow the rules.

On a positive note, I'm amazed at the response I've gotten to the forums I set up. It turns out people actually read this blog, and almost everyone who contacts me expresses that they can relate to my situation and feels we have quite a bit in common. It certainly makes any serious undertaking easier when you meet others in a similar situation - and it's great to see that there are a number of us all trying to succeed in this venture.

I believe we can do a great deal to help each other along the way.

Not for the Faint of Heart

(UTA)'s earnings news came out just fine last night, the stock opened higher and then it proceeded to tank, eventually closing down over 10%, right back to the $13 level. The eight week hold rule is either created specifically to ride out this kind of volatility, or it's just setting me up for disappointment. We'll see.

Aside from this stock there are a couple that could be setting up three weeks tight patterns - (BIDU) and (ARST) specifically. (BIDU) has been strong, (ARST) a bit hard to figure out this rally.

In fact, I have to admit I'm a little challenged overall in this rally. I've stopped out on (GMCR) which had the look of a big winner. I've bungled (FUQI) and (STEC) several times and continue to watch them lead the market while I don't own them. I feel at a bit of a crossroads and want to make any new purchases very carefully.

I have to admit investing is harder than I thought it would be.

I'm going to try something new and set up a private forum for investment discussion. There are a couple of readers of this blog who've contacted me and we enjoy sharing ideas and opinions on stocks. I find this very helpful and want to use a forum because once you get more than two people email isn't a great way to carry on a conversation. I'll post a link to the forum here, and see if there's any interest from other readers of this blog (if there are any besides my Mom).

Sell Stop:(GMCR)

Following the new rules I stopped out of (GMCR) today at break-even - it had advanced 10% so that's where I had my stop at $65. It bounced off the $63 level and looks to be coming back, but that's fine - the rules are in place to keep me from losing money.

At this time I still own (UTA) and (ARST), the former comes out with earnings tomorrow before the market opens. As I've learned this year, the key is going to be finding one or two winning stocks and sticking with them. Maybe (UTA) could be this stock - if not I'll look for the next opportunity.

Been Some Time...

I've taken just about a month away from posting here while I've tried to regroup. I started writing this blog to improve my trading results, and at a certain point it was doing the opposite - the idea of writing about my failed trades day after day began to lead to more failed trades. Trade review is very useful to an extent, but in a case like mine where I basically derailed, I don't think there was any purpose to beat myself up several dozen times. Instead I stepped back to look at the bigger picture, see the forest rather than the trees, so to speak.

The first thing I recognized, again, is that I'm extremely successful identifying winning stocks. The following is a list of the stocks I have owned at some time this year (some I've owned more than once):

(SNDA)
(TNDM)
(ARST)
(LFT)
(FUQI)
(TSRA)
(PWRD)
(GMCR)
(STEC)
(VIT)
(UTA)

There is no question this is an outstanding list of stocks, representing most of the top leaders of this rally. I'm not bragging, on the contrary I managed to filter down to a list of the best stocks in the market and still lose money! As bad as this is, there's a positive side. I know my problem is WHEN I'm buying stocks, not WHICH stocks I'm buying. That actually gives me a great deal of hope that I can improve my results.

So this is what I focused my review one. I wanted to know in general where my timing was wrong.

1. I found that my success rate on breakouts from bases was fine. If I'd only bought breakouts from bases I would've made only a few trades and I believe all of them would've been profitable - two of them massively so. Which brings me to my second realization.
2. On base breakouts I need to observe the 20% in three weeks rule. This rule states that if a stock advances 20% in less than three weeks it has the potential to be a big winner, and you should attempt to hold it for eight weeks. If I'd done this, I would've doubled my money on (SNDA) and (FUQI). Which brings me to point three.
3. Stick with the 7-8% stop loss rule in most situations. Early in the rally the market gave a very negative sign by logging a distribution day. I moved my stop loss orders up and stopped out of (SNDA) and (TNDM), both of which went on to be winners. In my fear of suffering a loss, I cost myself the kind of gains that make a year for a trader. By not allowing these purchases to work I forced myself to allocate the money elsewhere, often in less successful trades. Which brings me to point four.
4. Money is made in the market by sitting and waiting. I will not be successful from making a lot of small winning trades, but from finding big winners and letting them work until they show signs they are not working anymore. This is closely related to point 2, different side of the same coin you could say. The point is that by leaving my capital in a winner, I don't have to risk it in another stock which is an unknown quantity.
5. Buys when a stock bounces from the 50 dma are TOUGH. Buying even the best stocks at a new high after they've found support at the 50 dma has just not worked for me in this rally. They've tended to advance around 10% and then retreat. I suspect this is because the support lines are so far below the stocks, which have made rapid advances, that they are 'tired' by the time they make a new high. Whatever the reason, based on my experience I've changed my approach in two ways I'll outline below.
6. Once a stock has advanced 10% from the proper buy point, I'll move my stop order to the proper buy point. If a stock advances 10% I don't want it to turn into a loss. Obviously I must buy as close to the proper buy point as possible for full effect here.
7. I will buy a stock that has found support at the 50 dma if and when it closes above the 21 dma on 150% average volume or greater. I will buy at the end of the day if the close above the 21 dma is certain, or I'll buy the stock the next morning. I will only look for a 20% gain on bounce buys.
8. I will buy a stock that has a breakaway gap up opening to a new high on earnings news with massive volume no matter if there is a pattern or buy point. This setup is highly effective from what I've seen, and is therefore worth buying into. The stop will be 8% or 50 cents below the low of the breakaway gap day - whichever is higher.

To the best I was able to determine reviewing my activity this year, the simple changes above would've produced four 50 dma bounces stopped out at break even, one 50 dma bounce for an 8% loss, two 50 dma bounces for a 20% gain, and two base buys for 90% and 120% gains respectively. Obviously the last two are the trades that would easily have made my year, but what else is important to note is that I would've only had one trade for an 8% loss.

I don't want to overstate the results of a review because it's impossible to revise history. I can apply all these rules to past trades but in the moment it's never that easy. Nonetheless, I must continue to work toward a more mechanical and repeatable method, and I think this is another step toward that end.

I've already applied this to my current portfolio. At this time I own:

(GMCR), (UTA), (PWRD), and (ARST). The first three were bought from bases. (UTA) has qualified as a potential big winner and I have the stop in at $12.70 and otherwise will try to hold the stock until 9/22. (GMCR) and (PWRD) must advance further on Monday to qualify as potential big winners - (PWRD) may do this as it releases earnings on Monday. Otherwise I will target both for a 20% profit. (ARST) was a purchase off the 50 dma and I already have my order in for my 20% profit target. I did own (VIT) which had advanced 10% and then stopped out, no loss as per my new system - nice not to have a 10% gain turn into a 5% loss!!!

Well, that's it for tonight. we'll see what the market has in store for us tomorrow.

Trade Review:(SNDA)

This one is pretty easy. I managed to string a couple of winners together and my ego crowded me out of the room. I got impatient and arrogant, and bought (SNDA) on 6/3 as they released earnings to ho-hum response from the market. It was nowhere near a sound buy point, and certainly not the kind of massive move on earnings that would forgive buying a stock without a sound buy point.

I stopped out of it for a loss a week later. This would turn out to be strike one.

Trade Review:(FUQI)

(FUQI) might be the most difficult trade review I have to do, and it was a winner.

What makes it difficult is that strictly following CAN SLIM the stock didn't have a base and should not have been purchased - however, it's been one of the top performing stocks of this rally.

When I bought (FUQI) at the end of may, the chart really did look pretty ugly. The stock had formed a long cup that was far too deep, and it had formed this pattern under $10 making it effectively 'not count.'

What I saw, however, was massive volume on the right side of the chart as the stock climbed out of this deep base. Along with this the RS line was rocketing. I simply couldn't overlook these factors and bought the stock as it cleared a prior high point at $11.75.

I've seen some ugly charts turn in the best performances of this rally - (FUQI), (STEC), and (PWRD) are good examples - and I'd be willing to buy an ugly chart again IF it has the obvious signs of MASSIVE accumulation that these stocks demonstrated.

Of note also on (FUQI) is that I sold early. The stock was behaving very well and showing great strength, and I cashed in for a 20% gain. This stock had acted well enough that I should've allowed it more time to work, at least to let it test the 10 or 21 dma before selling.

Trade Review:(LFT)

Looking at the chart of (LFT) today I can't find any reason why I shouldn't have bought it when I did. The stock found support at the 50 dma on 4/28 and bounced off of it immediately, closing at the upper end of the day's trading range on above average volume - pretty bullish behavior. The time leading up to the pullback showed (LFT) as a true leader under heavy accumulation. The relative strength line was leading. This was it's first pullback to the 50 dma which gave it good odds of succeeding, nonetheless the breakout failed.

Unless, of course, one bought the stock right at the 50 day line.

This is why I continue to examine this as a new strategy. LFT could've been purchased on 4/28 as low as $20.30 - the buy point above the prior high was around $26 - the stock had already advanced 30% before I purchased it! It went on to $28.74 before heading right back to the 50 dma and stopping me out for a loss.

The more I look at leading stocks the more it seems that I could do better trading the moving averages at the line rather than at the new high. Some stocks will certainly fail to hold and stop out, but the others should be good for a 30 to 40% gain rather than the standard 20%. In general 50 day bounces seem to be good for around 10% above the prior high before they run into trouble.

So to summarize this purchase I like the stock pick but think that I can improve my timing. I think I can trade more aggressively around the moving averages and get better results, though there will be a learning curve involved.

A reader made an interesting comment in my last post so I'd like to clarify - I don't intend to stop buying first and second stage breakouts of good stocks. I'm only looking to adjust the method I use to buy on the moving average support purchases.

Continuing Review:(ARST) and (TNDM)

The next stock on my list for review this year was my first purchase of (ARST) on 4/15, followed by addon buys on 4/20.

One interesting note about this trade is that I did not buy the stock on the actual day it cleared a new high on a bounce off the 10 wma - I purchased it several days later after it consolidated gains from the big move. In fact, the stock traded down to $14 for about a week until the 10 dma caught up to it and it made it's next move to $16. Within another two weeks, I had my 20% gain and took profits. In this case that was exactly the right move, as (ARST) pulled all the way back to the mid-thirteens over the following couple of weeks.

So, what can I learn from a winning trade?

Well, for one thing on a closer look the stock never really touched the 10 wma line, I really bought it coming off the 21 dma. Because I bought at a new high instead of near this moving average, I'll look back on this purchase as lucky. In the future I would rather locate my purchases right around the moving average line with a tight stop. I would, in fact, not mind taking several runs at a stock with these tight stops around a moving average line. Three to four sell stops at 2% still keeps me within my 8% maximum loss threshold - it's not ideal but it shouldn't happen often.

Additionally, buying around the moving average should provide a better return if the stock can go on to new highs. I've seen good evidence that leading stocks can be purchased at the 21 dma and held until the stock dips back below this line. This method of gauging support would've allowed for healthy gains in most of this rally's leaders. In fact, as I've said before, I'm starting to view the moving averages as a better target for purchases than the pivot points outlined in the CAN SLIM system - they certainly seem to offer better support. The same is true for a 52 week high or all time high - I love to see a stock break above all prior resistance - this does not always occur with a cup with handle and other patterns.

So while I might've gotten a better price for (ARST), nonetheless it was a sound buy of a strong stock and I took profits at the correct time. This was a successful trade.

My purchase of (TNDM) on 4/17, on the other hand, ended up a 6% loss three days later.

This was a purchase from a bounce off the 50 dma. The stock never quite got to the 50 dma so I most likely could've purchased it crossing the 21 dma at about $23.25. If I'd purchased the stock this way and had my sell stop at 2% below the 21 dma, I would've stopped out with a slight profit. Obviously, if I can change my system so that my losers are profitable that is ideal.

Otherwise, (TNDM) is what I'd classify as a good loser. I bought it at the right time from a true buy point and it was a strong leader. I don't regret the buy as it was within my system.

As I'm thinking through this new method I'm remembering my intense need to be right. I think I need to cut myself off from the possibility of swinging at a stock several times around a moving average (even though I just said above that this could be acceptable). I'm too likely to flail about at some stock I am positive is the next (DELL).

Instead, I'm going to add another rule. If I stop out on a stock, I must take off five days before I can purchase that stock again. I should be able to remove this rule when I have more experience, but for now I think it's a good safety valve.

I also think that I should avoid buying off of a moving average once a stock has closed below it. At that point I'd like to watch for a base to form or for the stock to make a new high before I'll believe it's ready to move again.

I think that's all for now, I need to translate these thoughts into a list of buy rules that I can reference at any time - as I've shown I need to work off of a checklist to keep myself honest with my trading.

Sell Stop:Everything

I've stopped out of everything, I'm 100% cash and I'm back in the penalty box for three weeks.

Might as well quote a friend here:

"you are talking the talk but not walking the walk..."

In short, I made two huge mistakes:

• Ignored my penalty box rule - thought that I knew better than the system and didn't want to miss a move - this rule would've saved me my last 4 failed trades
• Put far too much capital at risk. I've added a spreadsheet to make sure this number never exceeds 3%

Now the question is, will I keep developing a sound system and keep failing to follow it.

Sell Stop:(GMCR), Continued Review - Focus on Impulse and Risk Management

Happy Independence Day to any proud American citizens out there!

Thursday my addon buy for (GMCR) stopped out for a loss. Rather than address this trade specifically, I'll include it from a philosophical standpoint in my continued review of this year's trading. I believe I've been able to filter down to some key points that will further force me to manage my risk better.

First of all, I believe I need to better manage my impulses. This is more difficult and not as obvious as it sounds when it comes to trading. Part of good trading is recognizing when a good stock is making the right move and being willing to buy it at that moment - likewise on the sell side. However, this is a very fine line to walk. I can easily be whipsawed by fluctuations if I misinterpret them as signs of a trend.

Secondly, when I'm buying off a support level like a moving average, I would rather buy close to the moving average with a tight stop than to wait for the high volume move up off the line. Maybe I'll change my mind about this after more time, but from what I've seen this will put the odds more in my favor.

Most importantly of all, I need to manage my risk better. I put too much capital at risk in the market at any given time. When I take several new positions within days of each other, none of them has time to move in the right direction and give me a profit cushion, allowing me to raise my stop loss order. This means I have 5% at risk in several positions, effectively putting 5% of my total portfolio at risk at one time. With margin, this number can get even larger. From this point on, I will have no more than 3% of my capital at risk at any given time. I may eventually lower this number. I will not be able to take new positions until the positions I hold are working - this alone should help me tremendously.

As far as the trade review goes, the next one on the list for me to discuss is just downright embarrassing. This was my attempt to short the S&P 500. Three times.

Once I saw the distribution day early in the new March rally and realized this meant there was a good chance the rally would fail, I stupidly attempted to short the S&P 500. There's not much worth discussing here, I've been investing for only two years and I have absolutely no business shorting the market. This group of trades comprises half of the money I'm negative on the year.

With my next post I'll begin to investigate some trades I might be able to learn more from than this simple and obvious mistake.

New Buy:(STEC), Addon Buy:(GMCR), Mid-Year Review

It looks a bit like I'm trying to trade my way out of a slump. I'm caught a bit between a rock and a hard place. On the one hand, I've over traded, made poor decisions, and lost some money. These factors indicate I should slow down. On the other hand, the rally is working, and leading stocks are acting well and breaking out. This is an excellent opportunity to pick up some stocks that I've been watching for an entry point for weeks. Never bashful, the latter is the approach I adopted. I'm not going to let past failures keep me from buying good stocks at the right time.

My first position in (GMCR) came close to stopping out on Russell Rebalancing day last Friday, but quickly recovered this week. I still haven't seen the volume come in they way I'd like, but the stock seems to be acting well around key support levels. I've been watching it bump up against $60 for about a week, so when it passed through that level I added to my holding. I would like to see the stock make a new high next week when the traders return from vacation.

Additionally, I've been patiently watching (STEC) to see if it would form a high tight flag pattern. It got impatient and broke out today after correcting only a week, and I bought it just above the previous high at $25.33. This stock has as good a technical and fundamental pedigree as anything I've seen. Now it just remains to be seen if that translates into 'monster stock' status.

That's my trading activity today, but I've been giving a great deal of thought to my trading activity this year. I started out quite well, and at this point I'm doing as poorly as the last two years. That is a wakeup call and an indication it's time for me to seriously evaluate what's worked and what hasn't. For the first time I feel I've progressed enough to gain some real value from reviewing the charts of my purchases. In the past that was nearly pointless, because most of the time I was buying crap. This year I've traded fantastic stocks, but more often than not I've timed my buys poorly. It's my goal to further quantify my purchase process in a way that is flexible but successful and repeatable.

At this point, my record on purchases is 2-11-2. With my goal being to hit .500 on my stock picks, I'm a long, long way off. That's fine though - the important thing is to get it right from here, I can't undo history.

Tonight I'll look at my first two purchases, (SNDA) and (TNDM), which I purchased on 3/12 and 3/13 respectively just as the market followed through on this rally.

(SNDA) had broken out from a double bottom pattern prior to the start of the rally on week volume. It reversed the following week all the way back to the 40 wma, where it found support. It rode this line and then the 10 wma right up until the follow through day where it broke out in above average volume, and this is where I bought it. The chart does not show the obvious accumulation that I tend to look for now (think the bars in the ATT wireless adds), but adding up the weeks in the chart the ratio was more toward accumulation than distribution.

(TNDM), on the other hand, did sport obvious accumulation in the chart. The volume soared in the weekly chart as the stock climbed the right side of a well shaped cup base. Like (SNDA), (TNDM) broke out ahead of the follow through day, then consolidated further, and exploded to new highs from the 10 wma on the follow through day.

Both stocks were in strong industry groups at the time of their breakouts, and both proceeded to notch gains of 20% or more before correcting. So why did I sell them for no gain?

Just two days after the follow through day, the market logged a distribution day across all the indices. Historically, this has spelled doom for a new rally 90% of the time. Still gun shy from my prior failures, I played it safe, moved my stop loss orders up, and stopped out of both positions in a couple of days.

Lessons Learned:

• Watching the market is important, but listen to the stock too. Both of these stocks were acting well and probably deserved some room to work.
• Trust the 5% stop loss. If I'm buying the right stocks at the right time in the right market, the 5% stop loss should protect me. I have to be careful moving stops, although I will do so to put it near key support levels when the situation calls for it.
• Don't be afraid to lose money. I should feel fear before buying a stock, not after. I should imagine how I will feel if the position doesn't work out, and if I will regret the purchase. Once I determine it is a sound buy, I should leave the stock alone and let it work (within reason).

All in all these positions were listed as a 'Push' - neither a win or a loss. They went on to be winners, but there was a strong argument for selling at the time that I did. I bought good stocks at the right time and sold for a sound reason, so I consider these fair trades that I do not regret.

I'll get into some trades that I do regret in my next post...

Sell Stop:(PWRD)

The Chinese MMORPG group got destroyed over the past couple of days after the government changed some rules so that gamers could no longer buy real world goods with in-game currency. My position on (PWRD), which was looking extremely promising, ended up at an 8% loss (the maximum I'll accept).

I started out the year well, and now I'm in quicksand. I've been here before. I'm pressing, struggling, and the harder I struggle the deeper I sink (more money I lose). PWRD was unfortunate because it was more a case of bad timing/unforeseen news than an issue with stock. The situation changed dramatically a couple of days after I got into the stock.

Nonetheless, this is a danger zone and I need to be very careful from here on out. I'm in two good stocks, (ARST) and (GMCR), and I'm watching (STEC) for the formation of a high tight flag pattern. Other than these stocks, I need to exercise caution and patience more than anything else right now. The losers are eating the winners alive.

New Buy:(GMCR)

Friday I thought I had the opportunity I've been waiting for to pick up (GMCR) as the volume started to come in while it retook the 21 dma after finding support at the 50 dma. I bought around $59 only to watch if fade throughout the day and get hammered in the closing minutes.

Most likely it was a Russell Index rebalancing move, but I don't know what that means for the stock today except that it leaves me in a precarious position. The stock is right near my stop, which I'm removing this morning for a bit until I see how the stock settles in and trades. This is the only situation that I ever leave myself vulnerable to a greater than 8% loss, but 90% of the time it's worked out in my favor - in fact I don't recall ever taking a loss greater than 8% on any position.

Of course, now that I've said that...

Quick Hit at the Open

I've said a number of times that I don't like leaving stop loss orders in at the open if a stock is close to stopping out, as the opening 15 minutes are often not indicative of a days action. Today this came true as I was whipsawed out of (PWRD) in the opening minute of trading - I wasn't watching the market at the time.

The stock promptly recovered and I purchased it back again at the same price, $30.15, adding a secondary buy at $30.74 as it made a new high. This stock has the massive ramp up in volume that has accompanied the winning stocks I've had in the past, we'll see if (PWRD) can do the same. I've definitely seen my optimism of earlier this year as I've struggled and made far too many mistakes. It's time to get back on track now.

Sell Stop:(TSRA); New Buy:(PWRD); Addon Buy:(ARST)

It was a busy day. I stopped out yesterday on (TSRA), which I had set the buy stop order wrong for. I've been on a not so smart streak lately and that just capped it off. After my strong start this year, I'm now just basically even and really need to be careful that I don't get into old habits of 'swinging away.'

Of course having said that, I made two new buys today... I've torn because I see so much opportunity - so many leading stocks are offering entry points here. One of my buys was (ARST) at $16.37 as it found support at the 50 dma for a second time since it's initial breakout. The relative strength on this stock has been improving, and it's worked for me so far, so I tried to go back to basics and add to what's working.

I also purchased (PWRD) at $30.15. This stock has been been popping up on my screens lately, and I just can't ignore the massive volume it's seen as it moves up the right side of what I see as a long and deep cup pattern. IBD says it has not offered a proper base, but neither did (FUQI) according to them. All I want to see is a stock clearing resistance on massive volume, and that's what I think I'm seeing with (PWRD). In fact, this quality was lacking in my recent failed purchase on (SNDA), which could've been bought better today than when I bought it last week. Back to my mantra, buy strength, not weakness.

Tomorrow should be interesting, with the low summer volume and post-FOMC-volatility.

Sell Stop:(SNDA), and a Rookie Mistake

Today (SNDA) stopped out as it dropped below the 50 dma. I still believe I'm going to have more success buying 50 day pullbacks around the moving average, but would be better off waiting until I see some volume come in to the upside.

I also made a pretty stupid mistake. I set up a couple of buy stop orders Sunday night, as often do in the evenings, but I had the price wrong and ended up buying (TSRA) around $24.26. I like this stock, but wanted to see it clear $25.14 before buying as I think I see some resistance around that area. Of course today was also not the day to take new positions in anything.

I'm not convinced this rally is done, but I've racked up 3 failed trades recently so I'm going to pause any new activity for now and just manage my current positions. The three failed trades are not (yet) in a row as I still have a successful trade working in (ARST), however common sense dictates caution at this time.

New Buy:(SNDA), Addon Buy:(ARST)

After keeping my eye on (ARST) for a few days after earnings I decided to rebuild to a full position in the stock again, picking up a third of a position at $17.44. The stock has been holding a nice zone during the weakness in the market lately, which I believe points to relative strength in this stock.

I also purchased (SNDA) this morning as it's finding support at the 50 dma. Recently I've decided to take a more aggressive approach with stocks finding support at the 50 or 21 day moving averages. I have more success buying early in this situation than late. Waiting until the stock clears a new high has shaken me out of several positions, and would've with (ARST) as well. It was the lower price I got on that stock that kept me in it through some of the volatility.

Additionally, as I watch the real leaders of this market, such as (FUQI), (STEC), and (GMCR) for example, they've given entry points at the 21 dma. I think that I know a titan stock when I see one, and should not be afraid to pick up shares at a pullback to the 21 dma with these stocks. I will still use my 5% stop loss and actually feel more confident buying at a key support level than at a pivot point that I've seen show little support to stocks.

The action of the market is still a question mark lately, but as long as we're in a rally I will continue to buy stocks, carefully. I think the low volume of the summer can cloud the signals the market is sending, and it's likely that we'll trail a bit sideways until the fall, but of course I can't predict that. I actually have two stocks on my watchlist that I'm willing to buy if they continue to act right, and then I will cut the weakest stock(s) from my portfolio and hold those that perform. Because I have no great confidence in my ability to pick an individual stock, I'd rather cast a slightly wider net and just let go those stocks that don't act the way I'd like. I don't mind using margin to do this for a short time, because I have my stop loss orders so tight. I just try to keep my capital risk fixed at any given time to an amount I can live with.

Sell Stop:(LFT), (ARST) Earnings, Analysis

(LFT) flashed a warning sign on Thursday when it came within a penny of the 52 week high intraday only to reverse and close down on the day. On Friday I stopped out of the stock for the second time.

It does not bother me to lose money on the same stock more than once. If a stock looks strong and stages strong breakouts, I'm willing to purchase it on a new breakout, even if I lost money on the last breakout. Why? The stock has no memory of me. I should have no memory of it. Some stocks may fail to breakout two or three times and then go on to huge gains, I saw one do this my first year investing, I'm afraid I can't remember the stock at this time.

Bottom line is I evaluate the fundamentals and technicals and if everything looks like it's in order, I purchase the stock. This was the case with (LFT), and looking back on it I don't regret the purchase. There may be an issue with the stock or it may be the market getting a little 'toppy,' either way I bought within my system and not all buys will go on to be winners.

(ARST) earnings came out after the close Thursday and they beat estimates by 38%, yet the stock dove 13% in after hours trading. That's a nerve wracking thing to watch, since it would've turned my 11% gain in the position into a 5% loss. Nonetheless, the approach I took was to leave my stop in place - I don't trust extended hours trading, institutions don't trade after hours and therefore it is often not a true representation of the supply and demand for a stock.

This said, it still was a difficult position to be in Friday morning, and I wasn't sure quite what to do - I never am in these cases, a problem which I will correct in my analysis below. For one thing, I don't like to leave stop orders in place at the market open when I know there is going to be this kind of volatility - the first 15 minutes can shake me out of a position only to see the stock move higher once it settles down. Obviously, the problem with this approach is that I have no protection from catastrophic losses.

The second issue I had was with my add on buy. As I've said, I want to have a 10% profit cushion heading into earnings day, for exactly this kind situation. With the size of my account, I've been setting my stops based on my cost basis - I'm a small enough trader that I don't want to have multiple commission charges where I can help. What this meant in this case was that my secondary buy was exposed to a greater percentage loss than I would normally accept.

In the end, I decided to take the stop loss off for the first 15 minutes and look to get out of my second position for a 5% loss if possible. The stock opened down 11% and came up to a point where I was able to stop out on the second position. The problem was, the stock continued straight up from there and turned the loss at the open to a couple percent gain at the close. Needless to say, I felt a bit dumb for selling that second position, but I had no way to know the stock would continue to rise.

With the partial sell of (ARST) and the stop out of (LFT) I was feeling pretty dejected on Friday. I'm back in the red this year despite my recent winners, and that left me wondering if I can ever really get this right. Whenever I feel that way I choose to take a hard look at what is standing in the way of my ultimate success, and correct it when possible.

Evaluating this year's activity, several things became clear to me:

• If I had followed my own rules, I'd be 3-3-2 for my record investing this year, meeting my goal of a 50% success rate and have more capital. It's the dumb stuff like shorting and buying (SNDA) nowhere near a buy point that is killing me
• If I have a potential big winner, I should at least let it test the 10 dma before bailing. I might've gotten an extra buck a share or more out of (FUQI) - I could still be holding it today
• With the small size of my portfolio, it makes more sense to set my stops once for the whole position off of the cost basis and then NOT MESS with it. As I said, it seems like I burn myself every time I try to meddle with my stops.

So once again it's good news bad news. I have a lot of stocks that I was close to profits on and bungled, and half the time I lost money it was simply because I didn't follow my own rules.

Unfortunately, it may be some time before I'm able to demonstrate I'm learning my lessons. It looks to me like this rally is topping and it may be some time before we rally again.

Sell Stop:(SNDA), (FUQI) Sold too soon

Thankfully, (SNDA) stopped out for a 5% loss today. I'm glad I lost money on this trade, because as I said I never should've made it. Not going to say anymore about it, because there's nothing more to say.

After further review, it's obvious I sold (FUQI) too soon. Hindsight is 20/20 but one thing that really bothers me is that the stock hadn't come near it's 10 dma or 21 dma at the time I sold it. I've had my botched handling of (SOL) in my mind for a year and that clouded my judgement on this trade. The problem is that I didn't recognize some key differences:

• (SOL) was a laggard in it's group, (FUQI) is a leader
• (SOL) had several violent shakeouts, (FUQI) had never traded down more than 5% intraday from the prior day's close in the time I owned it
• (SOL) failed to find support at the 10 dma and 21 dma, (FUQI) never touched the 10 dma in the week that I owned it
• (SOL) was purchased at the end of a bull market, (FUQI) may be at the beginning of a new bull market

I still have much progress to make on recognizing the environment as well as the health of the stock I own. I'm not ready to strictly follow the 'hold for 8 weeks rule' for potential big winners, but in the future I'll at least let them test the 21 dma and see how they act. If I'd done that with (FUQI) I'd be up another 20% on top of the 20% profits I took.

With that being said, I'm going to stop regretting this trade. This is a process of continuous improvement and if my mistakes are 20% profits I'm satisfied.

Addon Buy:(SNDA), New Buy:(LFT)

I recognized some time ago that orders executed in the first half hour the market is open can end up causing trouble. The first half hour is often quite volatile, and can act very differently than the rest of the day. This was the case Friday morning, as the market opened on a tear and triggered the buy stop for my second and final position in (SNDA) at a price of $64.22. Shortly thereafter the rally faded and (SNDA) ended up closing down a couple percent on the day.

The weekly chart still looks good and the downward move was on lower volume, below average in fact. Nonetheless, I have to admit that if I had it to do over again, I would not purchase this stock. It may go on to make me money, but that's not the point. I preach over and over that the system is what matters, yet I got on a bit of a good run picking stocks and just like that I purchased (SNDA) no where near any kind of legitimate buy point. This time it may work, but it's not a system and over time that kind of behavior will not be successful for me. I'm in the stock now and the market is seeing a strong rally so I may get away with this mistake.

What made things even clearer to me was that (LFT) staged a massive breakout on Friday and I was fully invested. The capital I had put into (SNDA) should've been waiting for a true breakout like (LFT) had. I used my margin to purchase (LFT) and I'll be very cautious with this. Basically I will evaluate (SNDA) and (LFT) daily and look to sell one or both of them if they're eating up profits from my other position(s). In a rally working as well as this one, I don't mind going on margin, but we'll see if it burns me.

Finally, (ARST) had a phenomenal day. It dumped over 10% early, coming within a few percent of my stop loss order, only to rebound off the 10 day moving average and close up a 45 cents. Very bullish behavior. If it can hold $18 a share going into earnings on Thursday I'll be in good shape.

Year Two Review

Somehow I missed my two year anniversary of my re-dedication to trading. May 27th marked the end of my second year. In short, I'm very pleased with the progress made in my second year when compared with my first.

I should clarify my definition of progress. I'm not as concerned about percentages and dollars as I am with improving the way I trade and the system I trade with. As it turns out, when I improve the latter the former follows right along in place - as expected.

From a quantifiable standpoint I did meet my goal of beating the S&P 500 after taxes and cost of investing materials. Not by a lot, but I beat it. I will now update this goal and work to beat the return I get on my IRA mutual fund portfolio. This portfolio represents the best return I can get with a passive account, and therefore if I outperform that I am money ahead. I don't have a timetable on reaching this goal, and do not expect to do so by the end of year three. However, I should be well on my way and improving my system and results continuously.

I was thinking over the past week about some of the things I have learned during the past year or two:

• It's a marathon, not a sprint - most of my mistakes have been a result of attempts to get rich quickly
• It's easier not to lose capital than it is to make it back - my first year I created a deficit for myself, and it may take another year or two just to break even
• All the hours of study and research really do pay off over time - I didn't see immediate results from the time I put in, but eventually all the information I've accumulated has begun to converge
• Keep an open mind and be willing to listen - anyone can teach me something useful if I'm willing to listen
• It's the system that matters, not the stock picking - this is not an ego trip - If I succeed it will be from discipline, not because I'm a great stock picker

Where I've improved:

• Documentation - I'm getting better about maintaining my watchlist - this is very necessary for constant improvement, I should be able to determine which patterns have been most successful for me (and least) along with other details on stocks I've purchased or passed on
• Chart Reading - I don't follow strict CAN SLIM guidelines for chart reading, and that's fine - I've used what I've learned from CAN SLIM and other readings to consistently identify chart patterns that have worked for me so far this year
• System Building - I've begun carefully documenting my buy, sell, and position sizing rules
• Discipline - I've made an effort to stick to my rules

Where I need continued improvement:

• All of the above - I don't think I'll ever feel that I'm so expert on any aspect of investing that I cannot improve
• More that I don't know yet - A lot of the lessons I've learned have been in hindsight - who knows what else I'll realize I could be doing better

While this is by no means an exhaustive study of my past year trading, I enjoy marking the time passed and thinking about about where I've been and where I am now. Without question this blog has been instrumental in my progress, and I look forward to maintaining it for years to come.

New Buy:(SNDA)

I bought (SNDA) today as it hit a new high on earnings news. The stock was not coming out of any kind of consolidation, but I thought I would take a shot at it because often a stock breaking to a new high on earnings news can have a very powerful move.

In this case, it didn't happen. ADR's took a hit across the board today, so perhaps that dampened (SNDA's) move, but regardless I'm down a couple percent. My stop is at 5% so we'll see what happens tomorrow.

On the positive side, (ARST) made another new high and even traded above $19 intraday. At this point I have the cushion I look for prior to earnings next Thursday, but of course that could change over the next week. As long as I'm up at least 10% in the stock I will hold it through the earnings release, otherwise I will sell it.

Sell:(FUQI)

Hard as it was, I sold (FUQI) today. It climbed above my $14.10 profit target early in the morning, so I set a stop loss order there. It dipped to that point briefly and then took off the rest of the day, eventually trading above $15 intraday.

Of course it's difficult feeling like I've sold too soon, but I did so for solid reasons, and it's always better to sell too soon than too late. If (FUQI) is a monster stock, it will set up a proper first stage base and give me an opportunity to purchase again.

The important thing is that I've now had a couple of 20% winners in a short period of time - a first in my investing career. My record is now 2-5-2, and 3 of my losing trades were my insane attempt to short the S&P 500 - boy would I like a chance to change that history.

At any rate, I finally have some evidence mounting to support a growing sense of confidence (healthy, not over-confident) that my system can work. I have a long way to go yet, but if you want to build a house you have to start laying bricks one at a time.

Another stock on my watchlist beat earnings estimates after the market close today, and I'll buy it if it gaps up to a new high at the open tomorrow. I owned this stock briefly at the start of this rally, it's been one of the main leaders, and one time I don't care about a stock being in a proper base is when it gaps to a new high on earnings news. In that situation the move is often so powerful I don't mind taking a chance on a stock that's not in some kind of consolidation.

(ARST) made a new high today, not on the kind of volume I would've liked to see but nothing to worry about yet. The weekly chart still looks really good, just needs to close this week with above average volume and I think we're in business.

Addon Buy:(ARST), and Looking for an Exit

The market certainly looked bullish today. (ARST) triggered my second buy order a day after the first purchase. I had this order in at $17.36, 10 cents above the prior high. The stock closed below the buy point at $17.09 but I'm not concerned at this point. My cost basis is well below the buy point from my early purchase at $15.60.

The stock I'm concerned about is (FUQI). It rocketed up today reaching my 20% profit threshold a few minutes before the close. I wasn't really prepared for the stock to gain this much in just one week, and by the time I began to attempt to enter the sell order it had pulled back, closing at $13.85. Now I'm back in an emotional dilemma. On the one hand, the stock is acting extremely well and could be held for eight weeks since it's gained 20% in just one week. On the other hand, it's had a huge move in a short time, is over twice the 200 dma, and is ripe for a pullback.

So what to do? A 5% trailing stop sounds like a reasonable idea, but that's at $13.53 and I wouldn't want to get shaken out in the early morning volatility only to see the stock launch yet higher. Having said this - I've felt the pain of watching almost all my gains in a stock evaporate while I was waiting for it to head higher. Some gains are better than no gains at all.

I will most likely let the first fifteen minutes of the market play out and try to put an order in after that to protect my profits. A 15% gain will be just fine and it's important that I stay on track and continue to log gains on my winners.

The 50 dma should cross the 200 dma on the Nasdaq tomorrow or Wednesday, I'm anxious to see if there are any fireworks.

New Buy:(ARST)

Since I sold (ARST) for a 20% gain earlier this month I've been watching the stock closely. It couldn't have been any more 'by the book' in the way it's behaved. It advanced just over 20% from it's buy point and then began correcting. Over the course of a few weeks it pulled back to the 50 dma, on progressively lower volume. Once it reached the 50 dma it traded below it intraday a few times, but always closed above this level - a clear indication the stock is finding support.

With the stock acting so well I decided I would purchase it again on any big volume move up. This came around noon on Friday, as the stock exploded for a 13% gain. I got in a bit late around $15.60, but that's fine. I took my time and made sure the volume was coming in as it should. I don't worry much anymore about buying a bit high - if I'm right about a stock a couple percent here or there shouldn't make any difference.

The stock closed above $16 and I'll add to my position if it makes a new high above $17.26.

Market still looks good to me - closed up Friday on higher volume than Thursday with a powerful move in the last fifteen minutes. Still watching the Nasdaq 50 dma which could cross the 200 dma as soon as this week.

Addon Buy:(FUQI)

I had been concerned that (FUQI) would pull back today and stop me out after making such a dramatic move over the past couple of weeks, but instead it gapped up at the open again and never came back to yesterday's close. In fact, it ran up to almost $13 before closing at $12.34. I adding to my position with my second and final buy at $12.10. I'm prepared for this type of volatile action, after all the stock has doubled in two weeks, plenty of traders are going to want to take profits. What I'm trying to look for is the stock to find some sort of temporary support area and ideally consolidate it's gains before pushing higher.

The stock is almost twice it's 50 dma and 200 dma, and that's why I'd like to see it take a bit of a break. The 50 dma is about to cross the 200 dma and they are both trending up, which is also technically bullish.

IBD has featured (FUQI) several times with various comments to the effect that the stock hasn't formed a proper base. I knew this was true when I purchased, but I tend to value clear accumulation in a chart far more than a perfect pattern. I'll learn over time whether or not that's a mistake.

The general market still offers reason to be concerned, five distribution days on the Nasdaq is nothing to ignore. However the other indices are doing well, and there is a particular setup that I'm watching with great interest. The Nasdaq 50 dma line is about to cross the 200 dma. My understanding is that many technicians look for the 50 dma to be above the 200 dma and the price to be above the 50 dma as a green light to buy stocks. Though the markets have been consolidating gains for the past few weeks, they could get a push higher once the moving averages line up this way in the next week or two. I'm anxious to see how this plays out.

New Buy:(FUQI)

I made a new purchase today with an initial buy of (FUQI) at $11.75.

This stock appeared on my high relative strength screen and I was impressed with the massive volume the stock has seen as it's exploded out of the right side of it's base. It's now the top industry group in IBD.

I have to admit though that the chart is ugly. I'm reading it as a nine month cup with an $11.75 buy point, but it could also be seen as a double bottom with a $7.99 buy point. The stock has never traded over $11.95 and if it can break that level has no over head resistance. That said, the chart is deep and the stock has made a massive move in a short time. Not only that, it's a small cap and a Chinese ADR. These factors point to high volatility and with my 5% stop losses I don't have much room. The stock closed a few percent below my purchase price today, so there's a good chance I will stop out tomorrow.

If I do I will continue to keep an eye on this stock though - I'd like to own it if it gets above $12 a share.

Market action was good today. The distribution days are still out there and it's hard to read much into a holiday trading week, but the Nasdaq retook it's 200 dma and the S&P 500 is getting close to that level too.

Sell Stop:(LFT)

Unfortunately, I'm making this post from the future.

I try to make all my trade posts the same day the trade occurs, but life doesn't always allow that.

Yesterday I added to my (LFT) position as it pulled back, and today I stopped out for a 5% loss on my cost basis for the entire position. Fine looking stock but came back on heavy volume and I'm fine being out of it.

In fact, the market is looking ripe for a correction and I'm content being all cash right now. I'm not seeing any good buying opportunities on my watchlist so I'll wait for one to come along and keep an eye on the overall market action for now.

Sell:(ARST)

I've been waiting a long time for the post I get to make tonight.

A long, long time.

Today, I sold (ARST) for a 20% gain.

The CAN SLIM system works on the premise that with the high quality of leading stocks you're purchasing, even if you are only right 40-50% of the time on your picks you will still be well off booking a 20% gain for every one or two 5% losses. Studies show that most stocks consolidate after an advance of 20-25% beyond a proper buy point, which is the reason for the 20% profit target.

The problem is that due to a variety of factors I haven't worked the system well at all. For one thing, I started investing at the tail end of a bull market. The odds were already against me. For another thing, I'm new to investing - again this stacks the odds against me.

I've made more than my fair share of mistakes, but tried always to learn from them. I've seen signs of progress along the way, and I know that I'm more effective today than I was when I began almost three years ago. Still, it was disheartening to look back and see that October of 2007 is the last time I sold a 20% winner. Between then and now I've lost a lot of my capital on losers. Some were legitimate trades - it's been a tough market and there's nothing wrong with nibbling at new rallys. However, many were just boneheaded plays like my recent attempt to short the S&P 500 - all that served to do was nullify today's profits!

Slowly but surely I'm getting it though. I needed to fail in order to succeed. I needed to feel the sting of losses to learn how valuable my capital is, and how skeptical I should be of any new purchase. Which is not to say that because of today's success I now see myself as having 'arrived.' I just recognize some progress.

Ok, so back to the reason for my reflection. I sold (ARST) at $16.74 today - 20% above the pivot point of $13.85 from several weeks ago. I believe this stock will go higher, and in fact it took off so quickly this morning I almost missed the opportunity to sell - I'll need to consider sell limit orders in the future, which is what I ended up using today. The important point is that I didn't rely on what I believe or think about this stock - I took the gain. I realize how difficult a 20% gain can be to come by, and I'm no longer looking for a 'home run.' I'm more than satisfied to make a 20% profit and consider that a successful trade, no matter what the stock does from now on. Of course I'll keep my eye on it for another buying opportunity. It will base sooner or later.

My previous sell rule was a 5% trailing stop when a position gets up 20% and I've scrapped that - if I'm going to sell I'll sell, there's no need to goof around and risk giving back some profits.

Setting Your Own Objectives - Part 3:Trading Ideas

I'm still working my way through 'Trade Your Way to Financial Freedom,' fortunately I'm getting to a more interesting part that deals with trading and not as much with if I cry at weddings...

What kind of markets do you want to trade? Is it appropriate to specialize? Do you want to trade only liquid markets, or are there some illiquid markets you'd like to trade?

• I want to trade common stocks listed on the NASDAQ or NYSE with a price greater than $10 and average shares traded daily greater than 300,000. I'm not interested in anything else.
• It's appropriate for me to specialize in this area because of my limited experience, the availability of resources, and there is just no need for me to try to get 'fancy.' There is plenty of opportunity for me in common stocks.

Do you want any conditions to set up before you enter the market? If so, what are those conditions?

• I will only buy stocks when the market is in a confirmed rally by the CAN SLIM system definition.
• I will not ALWAYS buy stocks when this is the case, I also look for strong, clear market leadership to emerge. I identify this by watching the number and quality of leading stocks breaking out, which is necessarily subjective.

What beliefs do you have about entering the markets? How important do you believe entry to be?

• I believe I will only succeed when I invest with the current market trend.
• I believe entry is critical, particularly in respect to the health of the overall market at the time of entry, the purchase of a stock as close to the proper buy point as possible, and correct position sizing to maintain the proper risk exposure.

Given your goals in terms of returns and draw downs, what kind of initial risk stop do you want? If it's close, will you be able to get right back into the market so that you will not miss a move?

• I think the second question is flawed, and a bit strange. Fear of missing a move is not a strong quality for a trader to have, in my opinion. I fear loss of capital.
• My experience with stops is that when I allow myself a range (this percent to that percent is acceptable) I almost always harm myself moving the stop around from the initial point I choose. CAN SLIM dictates you never lose more than 8% on a trade, and I've never violated this rule. However, I'm leaning toward a set 5% stop on every trade. If a stock drops much more than 5% below the buy point, I'm not sure I'm interested.
• Stops get more complicated as I average up into a position. This raises my cost basis, and I have to then reconsider the stop loss. If I make my initial purchase at the pivot point and my next purchase 3% above, my cost basis is now above the pivot point. If I set my 5% stop loss off of my cost basis, then I'm not giving the stock as much room to work - I can get shaken out by a healthy pullback. On the other hand, I don't want to risk additional capital on a trade from averaging up, that is contrary to the purpose.
• Considering all these factors, my decision is that I will never let my stop loss order exceed 5% of my cost basis in a stock. 5% is a loss that I can live with. If I see a number of successful stocks shake me out and move on to big gains, I will reconsider this decision.

How do you plan to take profits? Reversal stops? Trailing stops? Technical stops? Price objectives? Contrary to popular opinion, much of your emphasis should be in the area of stops and exits.

• Answer - all of the above! My rules follow below.
• Stop Loss order 5% below purchase price
• If the market tallys five Distribution Days in four weeks, sell stocks up less than 20% immediately, order a 5% trailing stop on those up over 20%
• Trailing 5% stop if the stock is up 20% in more than three weeks from the breakout
• If the stock price rises 20% in less than three weeks move the stop-loss order to break-even and try to hold the stock at least eight weeks. This may be the most subjective sell rule I have, and what I will look for is does the stock find support at the 21 day moving average.
• Sell on Climax Top action as defined in 'The Successful Investor'
• Sell if the stock loses 21 dma and fails to recover it within a day or two
• Penalty Box - No trading allowed for three weeks after three consecutive failed trades

What do you do in terms of position sizing?

• My initial purchase is as close to the buy point as possible, for 33% of my total capital.
• My secondary purchase is 2.5-3% above the buy point, for 16% of my capital.
• With the current amount of capital I have, I will not own more than two stocks at one time.
• As my capital grows, I will adjust my position sizing plan accordingly.

New Buy:(LFT)

Before addressing my latest trade, I want to spend a few moments on the past week, as it was quite a roller-coaster ride.

I made the mistake a couple of weeks ago buying (TNDM) within a week of it's earnings announcement. I was so enamored with the stock that I just wanted to own it, even with the additional risk involved. I'm not a lucky person, so I need to keep the odds on my side. I lost money on that trade.

I bring this up again because the next stock that really caught my attention was (BWLD). This stock had the ingredients I look for most - strong fundamentals, leading relative strength line, obvious signs of accumulation, and a price near an all-time high. The setup was almost perfect.

Almost.

(BWLD) broke out before earnings day. It did so explosively, advancing 10% past the buy point. It was difficult to sit on the sidelines when I had been targeting this stock, but every rule I have has a good reason behind it and is designed to help me succeed in the long run. As it turned out, (BWLD) disappointed the market with it's earnings report, and promptly gave back the earlier gains. The important thing is that I stuck to my plan.

My next prospective buy was (GMCR), which showed up on my new favorite screen Wednesday night. I want to digress for a moment and talk about this screen.

A few weeks ago my coworker and fellow CAN SLIMer (you can visit his blog here) brought up to me that he had been working with a new screen based on stocks with high relative strength. We had been noticing so many so-called 'leading stocks' lag the broad market that this was idea was brilliant in it's simplicity. This screen got right down to the real leaders, based on their price action (what else matters).

Within another day or two I saw on http://www.investors.com an old statistic that something like 85 to 90% of the greatest performing stocks of all time had an EPS rank of 90 or better and a Relative Strength rank of 95 or better at the time they began their run. At this point I got the message.

I threw together my own very simple screen, adding some basic criteria:

Earnings Per Share (EPS) Rating
From 90 to 99
Relative Price Strength (RS)
Rating
From 95 to 99
% Change in Latest Quarter's EPS vs. Same Quarter
Prior Year
Greater than or equal to: 25
% Change Latest Quarter's Sales
vs. Same Quarter Prior Year
Greater than or equal to: 25
Company's
Industry Group Rank
From 1 to 80
Current Price
Greater than or equal
to: 10.000
Current 50-Day Average Volume(1000)
Greater than or equal to:
300

Out of the thousands of publicly trade companies, this screen has not returned more than six in the few weeks I've been using it. The companies that do make it through this screen are performing very well, almost without exception. Some day I will try to base my mechanical trading system on this screen - but that is a post for another day.

So, I'm very positive on this screen and Wednesday (GMCR) made the cut after being adjusted for the earnings released that day. This setup was just as close to perfect as anything I'd ever seen. The stock was already rallying, earnings and sales were accelerating, the product is booming, the company beat estimates, raised guidance and announced a distribution deal with Walmart. If there ever was a no-brainer, this was it.

The stock had recently cleared a three weeks tight buy point and pulled back during normal trading on Wednesday. After hours it was up 20%, and there was no doubt it would gap up at the open. The buy rule on a break-away gap up open is that you can buy up to 10% beyond the pivot point (normally you don't buy more than 5% beyond this point). I set a buy limit order at $61.

The stock opened at $63 and never looked back. It traded as high as $79 on the day, a gain of 50% from the prior day's close. It was gut-wrenching. I felt as bad missing that buy as any time I can remember investing. I've had my fair share of struggles, I've made so many mistakes, and I've lost money - my family's money - that I intended to make returns on. I badly wanted a success, something positive to build on.

The only way I'm able to come to terms with it is to imagine a big league batter facing the best closer in the game - one he's had no success against. He takes the first pitch - a strike - and now the count is 0-1, he's behind. He flails at the second pitch - now 0-2 - he's further behind and in danger of pressing. Instead though, he calls time and steps out of the batter's box. He gathers himself and remembers his training. He calls upon the hours he's devoted to practicing his art. He shuts out the noise and steps back to the plate. He sees the pitch, and it's like the pitch he waited for his whole life. He connects and the sound and the feel are perfect - it is a home run, there is no question. As he rounds first base, he looks up to see the strong winds carry the ball just outside the foul pole. The home run never was - he heads back to the plate.

How does he respond?

There are going to be many ups and downs in my trading career. The best thing I can do is try to level these out. Bad is never as bad as it feels, and good isn't either. It's a business, and I won't be successful with every outing - that's why I'm building a business plan to make sure I'm successful more often than not.

Which brings me to today's purchase. Last night I scanned my High RS screen again and of the five stocks on the list one was within buy range - (LFT). The stock found support at the 50 dma Wednesday. I thought that I could catch it back near the 21 dma around $23, but it opened above $24 and never looked back. The pivot point was $26.09 and my buy stop was filled at $26.15. The stock made a run to $27 and pulled back to close above the pivot point, up 10% on the day on twice it's normal volume.

(LFT) is a Chinese ADR and could be volatile, but has a lot going for it. It's an IPO public less than two years. The fundamentals are strong, it's already had a 40% advance from an ugly cup pattern, and it shows plenty of signs of accumulation. The overall market is due for a pullback, which gave me pause, but until I can see the future I'll buy good stocks at proper buy points and take my chances with the overall market direction.

(ARST) had a low volume pullback this week. It was a very orderly move, but I'm a bit nervous as it's getting closer to my stop loss order. If it finds support at the 21 dma my position should be secure, but if it pulls back the the 50 dma again I will get stopped out for a loss of 1%.

This weekend I hope to find time to do some more work on my trading plan. The more homework I do the more confident I feel.

Getting Organized

In my last post I recognized that I've become a bit lazy in my approach to trading during the extended bear market. While I think my discipline has improved, my attention to detail has waned. The first action I took to address the issue was the documenting of my buy rules and position sizing plan. Today I'll take the next step and develop a plan for watchlist tracking.

I'll bet this is one of the most commonly ignored tasks by traders, and one that can materially improve results if it's done seriously. My coworker is a successful CAN SLIM investor and the first person to suggest to me some key items worth tracking on a watchlist.

What I think makes the watchlist so crucial is the insight it can offer in post trade analysis. Certainly I can always go back and look at a chart from the time I made a purchase, but with my watchlist I can track the some details like which screen identified the stock, what price I first noticed it, what the group relative strength was, etc. This allows me to later filter down the results of the stocks that make my watchlist and refine my process.

I'll learn if I'm more successful with stocks from a particular screen, or chart pattern, or industry group. I'll see if I avoided buying winning stocks and bought losers - and my notes (if kept properly) will tell me why I made these decisions. I also incorporated a link to the charts.

For anyone who loves free Internet resources like I do, google spreadsheets are great for this purpose. You can access them anywhere, share them with friends, and they have nifty functions built in which allow me to embed a live stock price and a link to the charts which I upload to my picasa account (picasa is a tool from google to manage images).

A quick note on the market - I'm starting to see more weakness than strength in the leading stocks. I don't know if the rally is over, but I'm in a bit of a wait and see mode now. (ARST) is holding up alright, and I see no need to pursue another purchase until a powerful looking stock comes along.

Buy Rules and Position Sizing

I think the extended bear market had some negative effects on my trading in addition to some of the positive effects. I was realizing today that I've gotten a bit sloppy, maybe even lazy, in the way I've been trading. I decided on the way home from work that in addition to the Sell Rules I have posted here I need to post my Buy Rules as a constant reminder the proper way to do things.

One mistake I made recently was the purchase of (TNDM) about ten days before the company is set to release earnings news. There is no 'official' CAN SLIM rule against this, but I've read about it and believe it's good practice to leave a three week buffer between the purchase of any stock and their earnings release. Would this mean I'll miss some winners? Certainly so. The buy stop I cancelled Sunday night was for a stock that went up over 10% today. Rules are not about individual situations - they are made to put the odds in my favor. If, over time I see this rule doing more harm than good I will adjust it or discard it, but for now I'm adding it to my system.

I guess I should mention the theory behind the rule. Buying a stock within three weeks of earnings news doesn't leave much time for the stock price to advance and provide some kind of cushion. Therefore, if the earning news is disliked and the stock tanks, I would be left vulnerable to a huge, even catastrophic loss. Better off to wait and if the stock is a real winner, another buying opportunity will present itself.

Another rule that I followed recently and want to document is 'buy strength, not weakness.' I'm proud that I did this on Monday when (TNDM) stopped out for a loss. Instead of getting attached to it and buying it back (trying to prove I was right about it), I channeled my capital into the stock that was working for me, (ARST). Buying strength doesn't just mean adding to stocks that are working, but also never adding onto a stock that is going against me. I must never make an addon buy at a lower price than my initial purchase - this will almost always end badly.

Next, on to position sizing. This was another lazy mistake I made recently, and a fine example how easily emotions can creep into trading without me even recognizing it. When I came off my three weeks in the penalty box, I purchase (ARST) and then a couple of days later (TNDM). I 'liked' (ARST) and I 'loved' (TNDM), so without giving it any thought, I had purchased a smaller initial position of (ARST) and a larger initial position of (TNDM). This is flawed for several reasons.

For one thing, if I'm not confident in the purchase of a stock, I shouldn't buy it in the first place. I don't think that I should have varying expectations for different purchases. I should either like the stock enough to buy it, or not. It can look like it has the right stuff, or not. There is no in between. Market conditions may dictate smaller pilot buys, but these should be equal for any stock purchased within a range of time.

Given that I believe a stock is worth buying, it makes absolutely no sense why I would purchase more of one than another. That would only be the right course if I knew which stock was going to succeed, which of course I don't and if I didn't, wouldn't buy the other at all! The math only works on a trading system if I treat all positions equally, and that requires a plan for position sizing. I'm going to add that to my blog tonight as well, and I'll detail it here.

Due to the small size of my portfolio, I will own a maximum of two stocks. As it grows (thinking optimistically) I will adjust this as necessary.

The first purchase in a stock will be with 33% of my capital as close to the pivot point as possible. I use buy stop orders with contingent stop loss orders at 5% below the purchase price. If the position is working, I can add on to it from 3-5% above the pivot point with 16% of my capital. Same numbers hold if I add a second stock to my portfolio.

If a stock and the market are working very well, I can consider purchasing at a secondary buy point (pullback to the 50 day moving average) on margin - but this would be evaluated very carefully and with a tight stop.